What is a Put Back Spread? Definition, Setup, and Example
A put back spread is a bearish options strategy that sells one put at a higher strike and buys two puts at a lower strike, creating a net credit with unlimited profit potential if the stock collapses.
What is a Put Back Spread?
A put back spread is a bearish options strategy that profits from a sharp downward move in the underlying stock. The position consists of selling one put option at a higher strike price and buying two put options at a lower strike price, all with the same expiration date. The strategy is a net credit trade, meaning the trader receives more premium from the sold put than they pay for the two bought puts. The position has limited risk at the higher strike and unlimited profit potential to the downside.
The put back spread is a type of ratio spread where the number of long options exceeds the number of short options. It is the bearish counterpart to the call back spread, which uses a similar structure with calls for bullish bets. The strategy is designed for traders who expect a large, sudden decline in the stock price.
How It's Calculated / Identified
The put back spread uses a 1:2 ratio. The trader sells 1 put at strike H (higher) and buys 2 puts at strike L (lower), where L < H. Both options share the same expiration date.
Net Premium Received = Put Premium at H - (2 × Put Premium at L)
The position collects a net credit if the premium from the sold put exceeds the combined cost of the two bought puts. The risk profile has three zones:
- If the stock closes above H at expiration: all puts expire worthless, and the trader keeps the net credit.
- If the stock closes between L and H: the short put loses value as the stock falls, and the loss equals (H - Stock Price) minus the net credit.
- If the stock closes below L: the short put loses (H - Stock Price), while the two long puts gain 2 × (L - Stock Price). The net profit is (Stock Price - H) + 2 × (L - Stock Price) + Net Credit, which grows as the stock falls.
The maximum loss occurs at the lower strike L, where the loss equals (H - L) minus the net credit received.
Worked Example
Consider TSLA trading at $250.00. A trader expects a major decline and sets up a put back spread with 30 days to expiration:
- Sell 1 TSLA $240 put for $6.00
- Buy 2 TSLA $220 puts for $2.50 each, total cost $5.00
Net credit received = $6.00 - $5.00 = $1.00 per share, or $100 per spread
If TSLA closes at $260 at expiration: all puts expire worthless. The trader keeps the $1.00 credit.
If TSLA closes at $230 at expiration: the short $240 put loses $10.00. The two $220 puts expire worthless. Net loss = $10.00 - $1.00 = $9.00 per share, or $900 per spread.
If TSLA closes at $190 at expiration: the short $240 put loses $50.00. Each $220 put gains $30.00, so two puts gain $60.00. Net profit = $60.00 - $50.00 + $1.00 = $11.00 per share, or $1,100 per spread.
The profit accelerates as the stock falls further below the lower strike.
When Traders Use It
Traders use a put back spread when they expect a crash or a major negative catalyst, such as an earnings miss, a regulatory action, or a macro shock. The strategy profits from a large move rather than a gradual decline, so it suits event-driven trading around earnings dates or FDA rulings.
The net credit structure means the trade pays the trader to enter, which is attractive when implied volatility is high. Selling the higher-strike put collects premium inflated by elevated volatility, while the two long puts cost less relative to their potential payoff. The strategy also works as a hedge for a long stock position when the trader expects a sharp drop but does not want to pay for a simple put purchase.
Limitations / Common Misconceptions
The put back spread has a maximum loss zone between the two strikes. A trader who expects a crash but gets a moderate decline suffers a loss. The position requires a move below the lower strike to reach profitability, and the breakeven point sits well below the lower strike.
A common misconception is that the net credit makes the trade risk-free. The credit is small relative to the potential loss in the middle zone. A stock that falls to the lower strike but not below it produces the maximum loss.
The position also suffers from early assignment risk on the short put. If the stock falls below the higher strike and the put goes in-the-money, the trader may be assigned and end up short 100 shares. The two long puts hedge that short position, but only below the lower strike.